Terrorist Attacks in New York City and Washington, D.C.: Implications for State Government Revenues in Florida 1

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1 Terrorist Attacks in New York City and Washington, D.C.: Implications for State Government Revenues in Florida 1 David Mulkey and Henry Cothran 2 This paper is one in a series prepared by faculty in the Department of Food and Resource Economics at the University of Florida. Other papers in the series address implications for the U.S. economic outlook (FE 311); U.S. trade policy (FE 312); and the Florida citrus (FE 313), and vegetable (FE 314), agronomic crops (FE 315), and tourism (FE 316) industries. The terrorist attacks on the World Trade Center in New York and the Pentagon in Washington, D.C. raised numerous questions regarding immediate and direct losses and the safety of U.S. citizens. Further questions have been raised about the longer-term economic implications of the attacks. In particular, there is concern about economic impacts and their effects on the Florida economy and resulting implications for tax revenues in a state highly dependent on the travel and tourism industries. To aid in understanding these concerns, this paper provides a brief overview of major sources of tax revenues in Florida, the types of programs funded with those revenues, and the options for dealing with any reductions. Information is also provided on the state revenue picture prior to the attacks based on current revenue estimates. State General Revenue Funding and Appropriations Each year as citizens and government agency officials follow legislative debates over state budgets, the issues being debated generally revolve around the allocation of state General Revenues. The General Revenue Fund consists primarily of sales tax receipts (around percent of the total) and receipts from other taxes such as the corporate income tax, the estate tax, and beverage taxes and licenses. Total expenditures from the General Revenue Fund represent about 42 percent of all state government spending, but they represent essentially all state revenues that are not earmarked for trust funds that support specific purposes. General Revenues represent the major source of funding for a number of important state government functions that are subject to annual allocation through the legislative process. In addition to the expense of operating state government, the General Revenue Fund provides funding for education, human services, criminal justice and corrections, environmental and natural resources programs, growth management, and transportation. The General Revenue Fund also supports the state judicial system. 1. This is EDIS document FE 317 (one in a series), a publicatio of the Department of Food and Resource Economics, Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida, Gainesville, FL. Published October Please visit the EDIS website at 2. David Mulkey, professor, and Henry Cothran, associate-in, Department of Food and Resource Economics, Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida, Gainesville, FL. The Institute of Food and Agricultural Sciences is an equal opportunity/affirmative action employer authorized to provide research, educational information and other services only to individuals and institutions that function without regard to race, color, sex, age, handicap, or national origin. For information on obtaining other extension publications, contact your county Cooperative Extension Service office. Florida Cooperative Extension Service/Institute of Food and Agricultural Sciences/University of Florida/Christine Taylor Waddill, Dean.

2 Terrorist Attacks in New York City and Washington, D.C.: Implications for State... 2 Each year the General Appropriations Act is enacted during the annual 60-day session (April-May) of the Florida Legislature to cover state spending for the fiscal year that begins on July 1 following the session. Since the state is required to have a balanced budget (Section , F.S.), funding appropriated by the legislature is limited by estimates of available revenue during the coming fiscal year. Thus, the revenue estimate available at the time of the legislative session (April-May 2001) and the resulting appropriations bill provided the basis for spending by state agencies, local governments, and school districts for the current fiscal year ( ). In terms of dollar amounts, the General Appropriations Act for the fiscal year was based on a revenue estimate of slightly less than $20 billion. Of that amount, about $14.8 billion (74 percent) was projected sales tax revenues, and the remainder was to come from other sources. Combining the forecast with other revenue considerations, the General Appropriations Act provided slightly more than $20 billion to cover fiscal year expenditures. Table 1 reports the actual dollar appropriations and shows, by general category, the amounts allocated to various program areas. The largest single program funded from the General Revenue Fund is education (Figure 1). Total education funding accounts for almost 54 percent of General Revenue appropriations. Of this amount, the largest component is funding for the K-12 public education system. Total funding for this component is almost $7.3 billion, most of which goes to local school districts through the Florida Education Finance Program. Funding for public schools makes up approximately 36 percent of General Revenue appropriations, state universities get 8.7 percent, and community colleges receive 2.5 percent of total General Revenue appropriations. Other program areas accounting for relatively large portions of General Revenue funding include human services at 25.8 percent ($5.2 billion) and criminal justice and corrections at 13.3 percent ($2.7 billion). Again, numbers reported in Table 1 represent funding appropriated by the Legislature during the 2001 session to provide for state spending in fiscal year beginning July 1, 2001 and are based on revenue estimates available in March Dealing with Revenue Shortfalls A key point in considering the numbers reported in Table 1 and Figure 1 is that they represent appropriations based on estimates of revenue available at the time of the legislative session; they do not represent actual revenues. Throughout the fiscal year, actual collections of state revenues may fail to meet projections or may exceed projections. In the latter case, excess revenues can simply be carried over to the next fiscal year. However, if revenues fall short of projections, then further actions may be necessary to balance state spending so that the state does not deficit spend. Article VII, Section 1(d) of the Florida Constitution requires the state to raise sufficient revenue to defray the expenses of the state. And Section (1) of the Florida Statutes requires the Governor to ensure that no deficit occurs in any state fund. Thus a shortage in general revenues must be addressed either by increasing income into the General Revenue Fund or reducing spending. Two general options are available. If the deficit is less than 1.5 percent of the General Revenue appropriation, the Joint Legislative Budget Commission can take steps to resolve the deficit by either reducing state spending, transferring excess trust fund balances or dipping into the rainy day fund. Deficits that exceed 1.5 percent of the General Revenue appropriation require a special session of the Florida Legislature for resolution. A special session of the Legislature may be called to deal with any deficit, but is required when the deficit exceeds 1.5 percent of appropriations. A deficit occurs when the official estimate of funds available in the General Revenue Fund falls below the total amount appropriated from that fund during that fiscal year. The Governor must first certify that a deficit will occur and then has 30 days to develop and submit a plan to eliminate the deficit to the Joint Legislative Budget Commission and the Legislature. Florida Statutes require that all branches and agencies of the state government receiving General Revenue must participate in deficit reduction

3 Terrorist Attacks in New York City and Washington, D.C.: Implications for State... 3 Figure 1. Operating Funds from Geneal Revenue for Fiscal Year efforts and that, generally speaking, the reductions must be applied uniformly. Chapter (5)(b) of the Florida Statutes provides guidelines for developing budget reduction plans. Chief among the guidelines is preservation of legislative policy and intent as expressed in the General Appropriations Act. Deficits can be resolved in one of five general ways. Funds from the Budget Stabilization Fund, sometimes called the rainy day fund, may be transferred to the General Revenue Fund. Current appropriations may be reduced [following the guidelines set forth in Chapter 216(5)(b), F.S., as noted above]. Excess cash balances in trust funds may be transferred to the General Revenue fund. Or, some combination of the above three options may be used. Finally, if the deficit resolution involves a special legislative session, the Legislature may increase revenues through the enactment of tax or fee increases. The Current State Revenue Picture Clearly, reductions in state revenues that are large enough to require reduced state spending have implications for a number of programs of statewide importance that are funded from General Revenue appropriations. These include state agencies as well as municipal and county governments and local school districts. We cannot at this point know the full impact of recent events on state revenues in the future. However, there is cause for serious concern. The state has already faced the prospect of dealing with revenue shortfalls in the current as well as the next fiscal year based on the financial picture prior to September 11, As to the current revenue picture, the General Appropriations Act for the current fiscal year was based on a revenue forecast of $ billion and, as noted above, the total General Revenue appropriation was slightly over $20 billion. At the most recent Revenue Estimating Conference (September 13, 2001) the estimate of available revenues was reduced to $ billion, a reduction of $673.2 million (a decrease of 3.4 percent). However, there are a number of non-revenue items (e.g., prior-year fund balances and vetoed appropriations) that reduce the estimated deficit in the General Revenue fund to $265 million, or 1.3 percent of the General Revenue appropriation. These non-revenue items do not include some $941 million in the Budget Stabilization Fund ( rainy day fund ). Thus, it would appear that non-revenue items plus reserve funds are more than adequate to cover the estimated deficit at the current time. However, two major considerations have not been addressed at this point. First, it is important to note that the Revenue Estimating Conference in September not

4 Terrorist Attacks in New York City and Washington, D.C.: Implications for State... 4 only reduced revenue estimates for the current fiscal year but also reduced revenue estimates for the next fiscal year ( ) by a larger amount ($801million) based on an expected reduction in the growth rate of state revenues. Second, reduced revenue estimates from the September conference for the current fiscal year and for the fiscal year were made before the tragic events in New York and Washington, D.C. on September 11, To the extent that these events undermine consumer confidence and contribute to further national economic decline, state revenues will experience further adverse impacts. Of particular concern is the potential impact on the state's tourism industries. Recent estimates indicate that visitors to Florida spend almost $50 billion each year and pay a significant portion of the states sales tax. A prolonged decline in tourist visits would have serious implications for sales tax revenues, and hence for those state programs funded from the General Revenue Fund. Again, impacts of recent events cannot be known with certainty but, as noted, there is cause for concern. Currently, plans are underway to convene another Revenue Estimating Conference to assess the impacts of these events on the state economy and the state's revenue picture. Furthermore, plans are being made to call the Legislature into session to address revenue/spending issues. At this point it appears that such a session may take place in late October.

5 Terrorist Attacks in New York City and Washington, D.C.: Implications for State... 5 Table 1. Operating Funds from Florida General Revenue for Fiscal Year Program Area Million Dollars Percent of Total Total Education $10,820.04M 53.7% Public Education, K-12 $7,263.94M 36.1% Comunity Colleges $500.95M 2.5% State Universities $1,748.89M 8.7% Other Education $1,295.27M 6.4% Human Services $5,203.78M 25.8% Criminal Justice and Corrections $2,683.72M 13.3% Natural Resources, Environment, Growth Management, and Transportation $416.80M 2.1% General Government $752.24M 3.7% Judicial System $261.28M 1.3% Total General Revenue Appropriations $20,137.86M Source: 2001 General Appropriations Act M = million dollars